Netflix tests investors’ risk appetite as signups fall short

Netflix Inc. (NASDAQ:NFLX) posted second-quarter subscriber gains that missed forecasts, rattling investors who bid the stock up almost threefold this year on expectations original shows would fuel faster growth.

The biggest subscription-video service reported 630,000 new U.S. streaming customers in the second quarter, according to a statement yesterday. While above year-earlier gains, that was about 100,000 shy of analysts’ estimates and the company’s highest forecast. The stock, this year’s top performer in the Standard & Poor’s 500 Index, slid as much as 4.8% in New York trading.

Chief Executive Officer Reed Hastings offered a frank assessment of the risk to investors as Netflix, based in Los Gatos, California, races to become the leading global provider of Internet TV. A price-earnings ratio of more than 245, among the highest in the S&P 500, leaves little room for error as Hastings channels resources into non-U.S. markets.

“We are choosing a strategy which has us put essentially all of our domestic profit into international expansion,” Hastings said on a first-ever video investor call. “It definitely takes a strong stomach on the part of investors.”

Netflix fell 1% to $259.37 at 9:37 a.m. and earlier traded as low as $249.50, for the biggest intraday drop since June 20. Through yesterday’s close the stock is up 183% this year.

Original shows such as “Arrested Development” and the Emmy-nominated “House of Cards” are a crucial component of the company’s efforts to attract viewers before must-have studio content becomes available, said Michael Olson, an analyst at Piper Jaffray Cos. in Minneapolis.

‘Fine Line’

The company is spending about 5% of its $2 billion annual content budget on original shows, bolstering its library of films and TV reruns before obtaining exclusive theatrical content from Walt Disney Co. and DreamWorks Animation SKG Inc.

“They’re trying to walk a fine line with originals,” Olson said. “It’s important for buzz around the service but not the main driver apparently for their growth numbers.”

Later this month, Netflix will premiere “Mako Mermaids,” a teen series. The company plans to expand its originals strategy into documentaries and stand-up comedy, Hastings said in an interview.

For the rest of 2013, the company plans the new Ricky Gervais series “Derek,” season two of “Lilyhammer” and “Turbo: F.A.S.T.” from DreamWorks Animation SKG Inc.